From an interesting review letter in Economic approach journal By Craig Garthweight:
Although research and development investment clearly respond to market opportunities, the accurate benefits made by these older investments are not clear. This is largely because the exact marginal products developed in response to these incentives are elusive. Certainly, a simple count of R&D spending or a simple count of the resulting new products is an incomplete metric of social welfare benefits.
An attempt to understand the social benefits of older products has focused on the scientific innovation of these marginal drugs. The scientific innovation of diagnostic tests initiated due to an increase in the size of the market as a result of the creation of the Downov, Garthvet, and Hermosila (2022) Medicare Part D (ie social insurer for prescription drugs) examine the scientific innovation of the goals initiated due to an increase in the size of the market. They find that the products involved in these additional tests were not novels in terms of their scientific approach, but they represented some novel combinations from the existing scientific approaches – which could provide new benefits to the market. For example, treatment effects or adverse events may vary in patients between those products, even those products with the same scientific approach (Jena et al. 2009).
Conversely, Criger, Lee, and Papanikolau (2022) take advantage of the fact that making Medicare Part D has already created different immediate effects on the balance sheet of firms with products on the market. They find that firms enjoying a large cash shock from Part D increased their investment in products that are more scientific novels, which are not even enjoying large cash infections alike than firms. Importantly, this effect is not powered by potential returns of new products, but by cash infections that reduce friction in the finance market for new innovations.
The paper is interesting throughout the time and provides a big observation of how economic markets affect the development and social welfare of the drug. You can read the entire paper here.
